Estonian corporate income tax (CIT) was originally intended to be a simple, modern, and investment-friendly tax system. The basic principle is: as long as profits remain in the company, there is no tax. However, a problem arises in the practice of managing financial liquidity, specifically when paying dividend advances.
When does tax liability arise?
In the classic corporate income tax model, tax is levied on the company's current income. In the Estonian corporate income tax model, taxation is deferred until the profit is distributed. Pursuant to Article 28m(2) of the Corporate Income Tax Act, the provisions on the taxation of distributed profits apply accordingly to the payment of advances on anticipated dividends.
Disputes surrounding this provision focus on two key issues:
- The moment of tax payment – should the lump sum be paid immediately after the advance payment is made, or only after the end of the year and the formal adoption of a resolution on the distribution of profit?
- The correct tax rate (10% vs. 20%) – what determines the flat rate if a company loses its small taxpayer status during the year?
Office position
Many doubts have arisen around the issue of taxation of advance payments, especially when a company changes its status from a small to a large taxpayer.
The situation became more complicated in early 2025, when the Director of the National Tax Information Service (KIS) began to depart from the previous, favorable approach. The new interpretation suggested that advance payments should be taxed at the rate in effect on the date the profit distribution resolution was adopted, regardless of the payment date. This pro-fiscal approach was confirmed by the judgment of the Provincial Administrative Court in Kraków of 24 April 2025 (reference number I SA/Kr 158/25).
However, subsequent tax rulings reverted to the earlier interpretation, recognizing that the relevant tax rate is the rate applicable to the company at the time of the advance payment. This was stated by the Director of the National Tax Information Service in rulings dated April 24, 2025 (0114-KDIP2-2.4010.44.2025.2.IN), and July 7, 2026 (0111-KDIB1-3.4010.247.2026.1.JG).
How to determine the flat rate?
1. Small taxpayer status on the date of advance payment
The Director of the National Tax Information (KIS) confirmed that in order to determine the appropriate lump sum rate when paying an advance on an anticipated dividend (when it is made without a previously adopted resolution on profit distribution), it is crucial to have the status of a small or large taxpayer in the tax year in which the payment in question occurs.
2. Distinction between an advance payment and a subsequent resolution on the distribution of profits
The aforementioned interpretation of 7 July 2026, however, introduces a very important and rigorous distinction for companies that grow dynamically and lose the status of a small taxpayer in the following year.
Advance payments are taxed at the time of payment at the rate applicable for the current year. However, when paying a dividend pursuant to a profit distribution resolution, tax must be calculated on the total amount (advances paid and dividends due) and the tax paid must be subtracted from the advance payments. The resulting difference will be the amount payable.
In practice, this means that two different tax rates may apply to the same pool of profits generated in a single year (10% for advances paid in the year of small taxpayer status and 20% for profits distributed by resolution in the following year, after losing that status). However, later the tax will be adjusted to the higher rate.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of July 10, 2026.
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